Intuitive Surgical (ISRG -1.93%) manufactures the da Vinci surgical system -- robotic-assisted devices to help surgeons perform delicate operations, and speed patients' recovery times.Intuitive's business has hit difficult times this year amid the COVID-19 pandemic. But the company's underlying vital signs suggest that investors shouldn't worry too much.
Image source: Intuitive Surgical.
Pummeled by the pandemic
Demand for robotic-assisted surgery has been strong in recent years. Intuitive Surgical's revenue increased 45.2% from $3.1 billion in 2017 to nearly $4.5 billion in 2019. In 2019, Intuitive Surgical systems performed 1.2 million procedures, up 18% year over year.
However, Intuitive's business has experienced significant disruption from the COVID-19 pandemic in 2020, starting in the latter half of March. As COVID-19 infections increased in the U.S. and Western Europe, the healthcare systems in those areas postponed surgical procedures and diverted resources to manage COVID-19.
Source: Intuitive Surgical earnings releases. Chart by author.
Because most of the procedures performed by da Vinci Surgical Systems were elective surgery, worldwide da Vinci procedure growth dropped significantly in the first quarter and got hit hard in the second quarter. In April, procedures per week in the U.S. represented approximately 30% of pre-COVID-19 levels. The number of da Vinci Surgical Systems shipped in the second and third quarter, and the revenue the company got from them, both trailed their first-quarter numbers.
However, it is worth noting that elective surgery does not mean optional. Prostate cancer can be slow-growing, so patients concerned about exposure to COVID-19 might simply want to perform the procedure later. Once hospitals began to perform elective surgeries again in May, Intuitive's procedures volume started to rebound gradually. Procedure growth turned positive again in the most recent quarter, suggesting that demand will ultimately return.
The COVID-19 pandemic isn't over. With cases rebounding, and some countries in Europe reinstating lockdown, the disease will probably cause Intuitive more pain in the fourth quarter. However, if this new wave of infections causes the stock price to drop, investors might consider it an opportunity to buy, for three key reasons.
Strong, stable recurring income
First, the company's recurring revenue has contributed more than 70% of its total revenue in recent years, and that figure grew nearly 20% annually in 2018 and 2019. Intuitive Surgical can earn between $700 and $3,500 from the disposable instruments and accessories used in a single surgical procedure, which means that when procedures grow, so do these sales. Instruments and accessories accounted for 73.7% of recurring revenue and 58.5% of total revenue in the third quarter of 2020.
In the company's most recent quarter, instruments and accessories revenue rebounded to $630 million, soaring by 4% year over year and 37% sequentially thanks to higher procedure volume. This recurring revenue suggests that instruments and accessories can provide stable, long-term income growth for Intuitive Surgical.
More systems, more money
Second, once hospitals adopt a da Vinci system, they tend to stick with it. Each system sells for between $500,000 and $2.5 million, and surgeons need lengthy, extensive training to qualify to perform operations with da Vinci. And once it installs a da Vinci, a hospital wants to use it as much as possible to turn those initial expenses into future profits. Those barriers create high switching costs for any company thinking of moving to a rival surgical system.
In the first three quarters of 2020, Intuitive shipped 237, 178, and 195 total system units, representing year-over-year changes of 0.9%, -34.8%, and -29.1%, respectively. By adding 610 new systems and retiring 327 older ones, the company posted a net increase of 283 systems in the first nine months of 2020, growing its installed system base to 5,865 at the end of this past September. That expanded base provides a sturdy foundation for future recurring income growth.
New product, new profits
Third, Intuitive Surgical is branching out from surgery into diagnostics. It launched its Ion endoluminal system in 2019, which enables minimally invasive lung biopsies.
It's hard to sell a new product right now, and at present, the Ion endoluminal system is only available in the U.S. But its potential remains vast, thanks to Intuitive Surgical's well-established and still expanding distribution networks. Intuitive Surgical can start cross-selling or even bundle-selling its systems now. At the end of September 2020, Intuitive Surgical had placed 32 Ion endoluminal systems for commercial use.
The Ion system could thus open up a massive opportunity for the company in lung biopsies alone. According to Zion market research, the global market for robotic biopsy devices is expected to grow to $683.3 million by the end of 2025.
A healthy prognosis
Investors should not focus on short-term numbers distorted by the COVID-19 pandemic; Intuitive Surgical is a long-term growth story. According to data from S&P Capital IQ, its revenue grew from $10.2 million in 1999 to $4.48 billion in 2019 -- a compound annual growth rate of 35.6%.
Intuitive enjoys tremendous room for further growth. According to Fortune Business Insights, the global market for robotic surgical procedures is anticipated to reach $13.3 billion by the end of 2025. In 2019, Intuitive Surgical commanded nearly 80% of the global surgical robot market, as estimated by Data Bridge Market Research. Yet the company still has a strong first-mover advantage to further grow in the U.S. and expand in the rest of the world, especially in Europe and Asia. In 2019, the revenue and unit shipments increased by 18.8% and 25.3% year over year for the U.S. market. In international markets, revenue soared 23.7%, while unit shipments rose 13.3%.
With all these long-term tailwinds, Fools interested in Intuitive might watch for any price drop as a potential buying opportunity.
